FOOD SCARES, MARKET POWER AND RELATIVE PRICE ADJUSTMENT IN THE UK

This paper is concerned with the impact of food scares, principally the BSE crisis, in the UK and focuses on price adjustment at different stages in a vertically-related market. Our interest is motivated primarily by the presence of market power that is alleged to occur in UK food retailing. From a theoretical perspective, we show that if market power has an effect on the margin between retail and farm prices, then this determines the specification of the cointegrating relationship and this in turn provides an empirical test of market power. We also account for different aspects of the BSE crisis including the shift in the retail demand function as well as the shift in the farm supply function (due to the mutually opposing effects of a worldwide export ban and the cull of infected and older beef cattle) and control for the possibility of substitution by consumers. The results suggest that we cannot reject the importance of market power in the UK food sector in influencing the retail-farm margin following the outbreak of BSE...